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The  Federal  Farm  Loan 
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Modem  American  Law  Lecture 


Blackstone  In«titute,  Chicago 


THE  FEDERAL  FARM  LOm 
BUREAU 


BY 

HERBERT  QUICK 

FORMER  MEMBER  FEDERAL  FARM  LOAN  BUREAU 


One  of  a  Series  of  Lectures  Especially  Prepared 
for  the  Blackstone  Institute 


BLACKSTONE    INSTITUTE 

CHICAGO 


CoPTEioHT,  1917,  Bx  Blackstone  Institdtb 
Copyright.  1921.  by  Blackstone  Institute 


■J^:    '  "  HERBERT  QUICK 

]\Ir.  Quick  was  appointed  a  member  of  the  Federal 
Farm  Loan  Bureau  at  the  time  of  its  creation,  and 
served  until  he  resigned  on  Aug.  1,  1919.  He  is  by 
profession  a  lawyer,  having  prepared  himself  for 
the  practice  of  law  while  principal  of  a  ward  school 
in  Mason  City,  Iowa.  He  was  admitted  to  the  bar 
in  1889,  and  practised  in  Sioux  City,  Iowa,  from 
1890  until  1909.  During  this  period  he  served  one 
term  as  mayor  of  Sioux  City  and  also  became 
widely  known  as  a  publicist  and  writer  on  economic 
subjects. 

In  1902  he  published  his  first  book,  and  since  that 
time  has  added  constantly  to  his  list  of  published 
\vorks.  These  books  include  several  novels,  a  volume 
of  short  stories,  a  book  on  world  problems — "On 
Board  the  Good  Ship  Earth" — and  a  w^ork  on  trans- 
portation and  conservation  —  "American  Inland 
Waterways."  The  "Brown  Mouse,"  published  in 
1915,  while  fictional  in  form,  has  attracted  atten- 
tion as  a  contribution  to  educational  thought  and  to 
the  solution  of  our  problems  of  rural  organization. 
For  several  years  he  was  editor  of  one  of  the  most 
influential  farm  journals  in  the  United  States,  and 
in  that  capacity  made  careful  studies  of  the  various 
problems  of  rural  life  in  America,  and  became 
recognized  as  an  authoritative  thinker  on  rural  edu- 
cation as  well  as  upon  the  general  topic  of  rural 
credits. 

During  all  of  these  years  he  was  a  voluminous 
writer  of  newspaper  and  magazine  articles.  He  was 
one  of  the  rural  economists  whose  counsel  was 
sought  by  Congress  in  framing  the  Federal  Farm 
Loan  Act,  and  his  activities  in  this  field  lead  to  his 
appointment  as  one  of  the  first  members  of  the 
Bureau. 

He  is  a  member  of  The  Cliff  Dwellers,  in  Chicago, 
and  of  the  Cosmos  Club,  in  Washington. 


^THE  FEDERAL  FARM  LOAN  BUREAU 
ITS  ORIGIN,  PLAN  AND  PURPOSE 

By 

Herbert  Quick 

DEFINITION  AND  LEGAL  STATUS 

The  Federal  Farm  Loan  Bureau  is  a  bureau  of  the 
Treasury  Department.  It  was  created  by  the  Federal 
Farm  Loan  Act  which  became  a  law  on  July  17, 1916, 
the  third  section  of  which  contains  these  words: 
' '  There  shall  be  established  at  the  seat  of  government 
in  the  Department  of  the  Treasury  a  bureau  charged 
with  the  execution  of  this  Act  and  of  all  Acts  amend- 
atory thereof,  to  be  known  as  the  Federal  Farm  Loan 
Bureau,  under  the  general  supervision  of  a  Federal 
Farm  Loan  Board.'* 

The  Act  declares  itself  to  be  "An  Act  to  provide 
capital  for  agricultural  development,  to  create  stand- 
ard forms  of  investment  based  upon  farm  mortgages, 
to  equalize  rates  of  interest  upon  farm  loans,  to 
furnish  a  market  for  United  States  bonds,  to  create 
Government  depositaries  and  financial  agents  for 
the  United  States,  and  for  other  purposes." 

ORIGIN  AND  HISTORY 

The  passage  of  the  Act  came  at  the  end  of  a  some- 
what protracted  period  of  preparation  in  the  public 
mind   and   in   Congress.     For   many   years   prior 

5 


6  MODERN  AMERICAN  LAW  LECTURE 

to  its  enactment  students  of  agricultural  economics 
had  recognized  the  fact  that  while  the  Ameri- 
can banking  system  has  been  fairly  adequate  as  a 
means  of  financing  the  other  businesses  of  the  nation, 
something  different  is  required  if  the  peculiar  finan- 
cial needs  of  the  farmer  are  properly  to  be  met.  A 
growing  knowledge  of  the  somewhat  protracted  and 
quite  successful  experience  which  European  coun- 
tries have  enjoyed  in  the  establishment  and  main- 
tenance of  distinctly  rural  and  agricultural  financial 
systems  reacted  very  strongly  upon  American  public 
opinion  while  in  this  formative  state. 

Peculiar  Needs  of  American  Agriculture 

American  agriculture  originally  found  itself  and 
still  to  a  large  extent  persists  in  an  environment  very 
different  from  that  of  European  or  Asiatic  agricul- 
ture. Both  labor  and  capital  were  originally  scarce 
in  America,  and  both  interest  and  wages  were  Mgh. 
Thus,  two  of  the  three  basic  factors  of  production, 
labor  and  capital,  were  difficult  to  obtain,  whereas 
under  European  and  Asiatic  conditions  both  of  these 
were  plentiful,  and  even  redundant.  On  the  other 
hand  land  in  America  was  plentiful  and  cheap,  while 
under  the  conditions  surrounding  European  and 
Asiatic  agriculture  it  was  scarce  and  high.  Thus,  in 
the  division  of  produced  wealth  into  the  three  eco- 
nomic funds,  interest,  wages  and  rent,  the  two  former 
in  America  were  of  primary  importance,  while  in 
Europe  and  Asia  they  were  of  secondary  importance. 
On  the  other  hand,  the  third  factor,  rent— by  which 
is  meant  not  only  rent  in  the  ordinary  and  popidar 


THE  FEDERAL  FARM  LOAN  BUREAU      7 

sense,  but  also  rent  in  the  economic  sense,  which 
includes  the  price  to  be  paid  for  land — while  of  pri- 
mary importance  in  Europe  and  Asia,  was  of  sec- 
ondary importance  in  the  United  States.  Thus,  it 
was  not  only  natural  but  inevitable  that  in  America 
agriculture  land  was  and  to  a  considerable  extent 
still  is  used  freely  and  extensively,  and  both  la])or 
and  capital  were  and  still  are  used  sparingly.  This 
sparing  use  of  labor  and  capital  was  made  possible, 
and  was  accentuated  and  continued,  by  the  opening 
up  of  great  areas  of  free  or  cheap  prairie  land  and 
by  the  almost  simultaneous  invention  of  certain  types 
of  labor-saving  agricultural  machinery,  which  enabled 
the  farmer  by  small  investments  of  capital  and  labor 
to  utilize  extensive  areas  of  very  fertile  land.  The 
economic  effect  of  this  American  agricultural  devel- 
opment was  of  world-wide  importance,  and  for  many 
years  it  forced  the  virtual  abandomnent  of  great 
areas  of  land  in  the  eastern  part  of  the  United  States, 
caused  a  readjustment  of  land  values  between  the 
older  states  and  prairie  states,  and  plunged  the  Euro- 
pean farmer,  through  the  competition  of  American 
agricultural  products,  into  a  period  of  gloom  and 
adversity  which  had  much  to  do  with  the  develop- 
ment in  Europe  of  the  typically  rural  financial  sys- 
tems, which  have  been  to  some  extent  copied  in  the 
Federal  Farm  Loan  Act. 

Necessity  for  New  System 

The  economic  necessity  for  a  separate  system  of 
finance  for  the  agriculture  of  the  United  States  is 
deduced  from  certain  rather  simple  financial  and 


8  MODERN  AI^IERICAN  LAW  LECTURE 

agricultural  facts.  A  careful  study  of  farm  mort- 
gage conditions  in  the  United  States,  published  in 
1916,*  indicates  that  the  average  rate  on  farm  loans 
prior  to  the  passage  of  the  Federal  Farm  Loan  Act 
was  somewhat  in  excess  of  8  per  cent,  per  annum. 
This  ''rate"  includes  interest  and  also  commissions 
and  other  fees  paid  to  agents  and  brokers,  but  does 
not  include  such  costs  as  the  examination  of  title 
and  the  making  of  abstracts.  The  cost  as  given  is  a 
careful  approximation  and  makes  no  claim  to  mathe- 
matical exactness.  In  different  parts  of  the  country 
the  rate  varies  sharply  from  the  norm.  In  New 
Mexico,  for  instance,  the  rate  was  on  the  average 
nearly  11  per  cent. ;  in  Florida,  nearly  10  per  cent. ; 
in  Montana,  10  per  cent.;  in  Iowa  about  6 
per  cent.;  in  New  Hampshire,  only  a  little  in 
excess  of  5  per  cent.  Even  in  the  same  state 
these  rates  differed  greatly  as  to  localities.  In 
California,  for  instance,  the  rate  varied  from  6I/2  per 
cent,  in  one  district  to  nearly  8  per  cent,  in  another, 
and  in  Washington  from  8  per  cent,  in  one  district 
to  nearly  9  per  cent,  in  another.  In  the  main,  the 
rate  varied  with  the  local  supply  of  money  for  farm 
loan  purposes,  and  not  altogether  according  to  the 
fundamental  integrity  of  the  security.  The  exemp- 
tion of  mortgages  from  taxation  has  in  some  places 
resulted  in  a  low^ering  of  the  rate  of  interest.  The 
lowest  rate  prevailing  in  any  state  was  in  New  Hamp- 
shire under  a  law  which  provides  that  real  estate 
mortgages  shall  be  exempt  from  taxation  in  all  cases 

*  Costs  and   Sources   of  Farm-Mortgage   Loans   in   the   United    States. 
C.  W.  Thompson,  United  States  Department  of  Agriculture,  Bulletin  384. 


THE  FEDERAL  FARM  LOAN  BUREAU      9 

in  which  the  interest  rate  does  not  exceed  5  per  cent, 
per  annum.  There  is  no  agricultural  or  financial 
reason  to  believe  that  farm  mortgages  in  New 
Hampshire  are  any  safer  investment  than  in  Iowa 
or  Illinois,  or  in  many  other  states  where  the  interest 
rate  is  higher  than  in  New  Hampshire.  In  fact, 
many  mortgages  in  zones  of  higher  interest  rates 
remote  from  local  supplies  of  loanable  funds  prob- 
ably are  safer  when  fundamental  values  are  con- 
sidered than  are  those  in  some  zones  of  low  interest 
rates.  The  cheapness  of  money  on  farm  loans  in 
New  Hampshire  is  clearly  the  result  of  an  adequate 
local  supply  of  money  in  connection  with  exemption 
from  taxation.  Other  factors  which  cannot  be  con- 
sidered here  have  always  entered  into  the  interest 
rate  and  cost  of  farm  loans. 

The  figures  given  do  not  adequately  express  the 
hardships  under  which  vast  numbers  of  farmers  in 
the  United  States  have  suffered  from  excessive 
interest  rates.  A  careful  study  of  the  situation  at 
hearings  held  by  the  Federal  Farm  Loan  Board  lead 
to  the  conclusion  that  many  of  the  most  extreme  cases 
of  extortion  escape  the  statistician,  and  are  not  found 
either  in  Dr.  Thompson's  bulletin  or  anywhere  else 
in  print.  As  in  all  cases  of  extortion  through  interest 
rates  and  commissions  for  loans,  the  burden  has 
rested  and  still  rests  most  heavily  on  those  least  able 
to  bear  it.  It  is  true,  however,  that  the  figures  given 
represent  no  doubt  vdth  an  approximation  to  ac- 
curacy the  burden  borne  by  average  agriculture  in 
the  United  States  and  are,  therefore,  of  controlling 
significance  to  the  economist  and  student. 


10  MODERN  AMERICAN  LAW  LECTURE 

Changing  Conditions  Impose  New  Burdens 
Under  conditions  of  agriculture  in  which  values 
are  rapidly  advancing  and  the  soil  is  still  in  a  state 
of  virgin  fertility,  and  while  the  loans  are  on  the 
average  small,  a  rate  of  10  per  cent.,  or  even  more, 
can  no  doubt  be  borne  by  agriculture.  But  as  soon 
as  land  values  become  high  and  farm  loans  conse- 
quently large — in  other  words,  when  the  element  of 
land  value  becomes  of  prime  importance — it  is  the 
opinion  of  agricultural  economists,  and  this  opinion 
is  supported  by  farm  experience,  that  a  low  interest 
rate  becomes  an  absolute  economic  necessity,  and 
that  the  interest  rate  which  has  prevailed  over  most 
of  the  United  States  becomes  burdensome,  if  not 
actually  ruinous.  Let  us  take  the  case  of  a  typical 
Iowa  farmer,  for  instance.  Fifty  years  ago,  when 
the  farm  mortgage  scarcely  ever  exceeded  a  debt  of 
$10  per  acre,  an  interest  charge  of  10  per  cent,  imposed 
upon  the  farmer  an  annual  charge  of  $1  per  acre. 
His  crops  at  that  time,  while  lower  in  market  price 
than  now,  were  actually  redundant  in  yield.  One 
and  one-third  bushels  of  wheat  per  acre  at  seventy- 
five  cents  per  bushel,  or  five  bushels  of  corn  at  twenty 
cents  per  bushel,  would  at  that  time  pay  his  interest 
charge.  A  mortgage  charge  of  $50  per  acre  is  now 
common  in  Iowa.  Under  noi-mal  conditions  today 
the  price  of  wheat  does  not  laile  over  $1  per  bushel, 
or  of  corn  more  than  forty  cents,  while  the  interest 
rate  averages  6  per  cent.,  imposing  an  interest  charge 
of  $3  per  acre.  Under  the  lower  rate  of  interest  now 
prevailing,  therefore,  in  terms  of  agricultural  pro- 
duction the  interest  charge  on  an  Iowa  farmer  is 


THE  FEDERAL  FARM  LOAN  BUREAU     11 

three  bushels  of  wheat  per  acre  or  seven  and  one-half 
bushels  of  corn.  Analogous  rates  of  increase  in 
burden  will  be  found  to  rule  through  the  whole  field 
of  farm  production,  not  only  in  Iowa  but  in  every 
part  of  the  United  States  in  which  agriculture  has 
passed  from  the  temporary  extensive  phase  formerly 
mentioned  to  the  more  permanent  and  more  inten- 
sive phase  upon  which  it  is  now  entering.  The  eco- 
nomic need  for  lower  interest  rates,  therefore,  is 
apparent,  especially  in  view  of  the  fact  that  the 
tendency  of  the  mortgage  burden  is  constantly  to  in- 
crease as  agriculture  becomes  more  highly  developed. 

Necessity  for  Long  Term  Loans 

The  development  of  agriculture,  however,  neces- 
sitates not  only  a  lower  rate  of  interest,  but  also 
different  arrangements  with  reference  to  the  time 
of  payment.  Under  conditions  prevailing  in  a  new 
country  the  time  element  is  not  of  controlling  impor- 
tance. Money  on  farm  loans  is  under  such  conditions 
usually  in  demand  for  purposes  which  call  for  small 
investments  and  need  have  only  short  periods  to  run. 
It  is  obvious  that  the  Iowa  farmer  of  fifty  years  ago 
could  even  under  conditions  of  pioneer  hardships  hope 
to  pay  off  in  five  years  a  mortgage  of  $10  per  acre, 
absorbing  as  its  interest  rate  only  one-fifteenth  of  his 
agricultural  production.  Under  present  conditions 
his  ability  to  pay  off  in  five  years  a  mortgage  five 
times  as  large,  absorbing  one-tenth  or  more  of  the 
output  of  his  farm,  is  obviously  doubtful.  It  is  in 
fact  true  that  the  average  good  farmer  under  present 
day  conditions  needs  a  long  time  loan,  analogous  in 


12  MODERN  AMERICAN  LAW  LECTURE 

its  ternis  of  payment  to  the  long  time  bond  issues  of 
public  utility  and  other  corporations,  if  he  is  success- 
fully to  carry  on  the  work  of  developing  his  farm. 

Increasing  Amounts  of  Capital  Needed 

Agriculture  is  changing  from  pioneer  methods  to 
those  of  a  fully-settled  continent.  The  virgin  fer- 
tility of  the  soils  is  becoming  depleted.  An  increasing 
urban  population  must  now  be  fed,  sheltered  and 
clothed.  The  one-crop  system,  such  as  wheat  after 
wheat,  corn  after  corn,  or  cotton  after  cotton,  is 
recognized  as  ruinous  to  the  soil,  to  the  farmer,  and 
to  the  nation.  But  the  grain  farmer  or  the  cotton 
farmer  cannot  change  his  methods  without  investing 
in  live  stock,  machinery,  buildings,  fencing  and 
reclamation,  large  sums,  the  returns  from  which, 
while  sure,  in  case  of  wise  investments,  will  on  the 
average  be  slow.  Out  of  these  returns  he  must  live, 
as  well  as  pay  interest  and  reduce  principal.  Dr. 
D.  H.  Otis,  of  the  University  of  Wisconsin,  finds 
from  exhaustive  researches  that  on  dairy  farms 
where  the  operating  capital  equals  from  10  to  15  per 
cent,  of  the  total  value  of  the  farm  property  the  profits 
to  the  farmer  are  usually  low,  while  farms  with  an 
operating  capital  of  from  25  to  40  per  cent,  are  usually 
more  highly  profitable.  It  is  for  the  purpose  of  fur- 
nishing funds  for  changing  from  the  improfitable  to 
the  profitable  condition  that  the  Federal  Farm  Loan 
Act  is  on  the  statute  books.  The  national  problem 
justifying  the  legislation  is  to  increase  the  volume 
of  farm  business  per  square  mile,  to  generate  a 
steadier  and  fuller  supply  of  food  and  other  farm 


THE  FEDERAL  FAR^I  LOAN  BUREAU     13 

products,  to  bring  into  cultivation  lands  now  uncul. 
tivated  or  only  partially  cultivated,  and  to  prevent 
the  destruction  of  the  basis  of  the  nation's  life,  the 

^^^^'  PROPOSED  REMEDIES 

A  great  many  bills  were  introduced  in  both  Houses 
of  Congress  to  accomplish  the  objects  of  the  Federal 
Farm  Loan  Act.  These  fall  l3roadly  into  three  classes : 
(1)  Proposals  for  direct  loans  by  the  Federal  Gov- 
ernment to  farmers,  the  funds  to  be  provided  by  sales 
of  Govermnent  bonds;  (2)  Schemes  for  the  organi- 
zation of  land  banks  organized  by  lenders,  having 
authorit}^  to  provide  themselves  with  funds  by  the 
sale  of  their  owti  bonds;  and  (3)  Systems  under 
which  the  borrowers  might  organize  cooperatively 
through  land  banks  of  their  own  under  the  general 
principles  of  the  Landschaft  banks  of  Germany. 
Bills  of  the  second  and  third  classes  provided  for 
Government  inspection  and  regulation,  and  most 
bills  of  the  third  class  for  a  greater  or  less  degree 
of  participation  by  the  Government  in  the  supplying 
of  funds.  No  great  support  being  developed  in 
Congress  for  direct  Government  loans,  the  choice 
between  the  other  tw^o  systems  became  the  real  issue, 
and  the  Federal  Farm  Loan  Act  as  finally  passed 
combined  the  two.  It  provides  for  a  system  of 
National  Farm  Loan  Associations,  which  are  coop- 
erative associations  of  borrowers,  and  for  Federal 
Joint  Stock  Land  Banks,  which  are  organizations 

of  lenders.  ,  ,  .  „^  „ .  „,^« 

JOINT  STOCK  LAND  BANKS 

The  joint  stock  land  bank  feature  of  the  law  ])ro- 

vides  for  the  chartering  by  the  Federal  Farm  Loan 


14  MODERN  AMERICAN  LAW  LECTURE 

Bureau  of  corporations  for  carrying  on  the  business 
of  lending  money  on  farm  mortgage  security  and 
issuing  farm  loan  bonds.  The  provisions  of  the 
entire  Act  apply  to  them  so  far  as  they  are  applicable. 
They  are  under  the  control  of  the  Federal  Farm  Loan 
Bureau.  Their  bonds  must  be  physically  readily 
distinguishable  from  the  farm  loan  bonds  issued  by 
the  Federal  Land  Banks  described  in  the  following 
pages.  Their  bonds  and  mortgages  are  exempt  from 
taxation,  and  the  lands  on  which  their  loans  are 
placed  must  be  appraised  by  appraisers  appointed 
by  the  Bureau.  They  constitute  a  system  of  private 
institutions  to  make  farm  loans  under  public  inspec- 
tion and  regulation. 

THE  CO-OPERATIVE  SYSTEM 

The  establishment  of  any  system  of  farm  loan 
agencies  under  Government  regulation  and  control 
is  a  distinctly  new  thing  in  this  country,  and  the 
setting  up  of  the  Federal  Joint  Stock  Land  Bank 
system  would  in  itself  be  an  important  financial  inno- 
vation. The  most  important  feature  of  the  Federal 
Farm  Loan  Act,  however,  seems  to  be  the  cooperative 
farm  loan  system,  which  will  now  be  described.  The 
basic  unit  of  this  system  is  the  cooperative  organi- 
zation of  borrowers  called  the  National  Farm  Loan 
Association.  The  nearest  approach  to  the  National 
Farm  Loan  system  which  we  have  heretofore  had  in 
America  is  the  mutual  building  and  loan  association, 
which  has  for  many  years  been  a  well  known  thing 
in  city  life.  The  building  and  loan  association  is  an 
organization  of  borrowers  whose  savings  are  accu- 


THE  FEDERAL  FARM  LOAN  BUREAU     15 

mulated  through  a  system  of  monthly  pajiiients  and 
the  money  thereby  obtained  loaned  to  the  members 
of  the  association.  These  useful  associations  have 
familiarized  the  people  of  the  United  States  TN-ith 
the  two  chief  features  of  the  National  Farm  Loan 
Association,  to  wit:  the  cooperative  organization  of 
borrowers,  and  the  extinguishment  of  mortgage  debts 
by  a  process  of  amortization. 

A  National  Farm  Loan  Association  may  be  formed 
anywhere  in  the  United  States  by  ten  or  more  persons 
who  at  the  time  are,  or  are  shortly  to  become,  engaged 
in  the  cultivation  of  the  farm  mortgaged  and  whose 
contemplated  loans  amount  in  the  aggregate  to  not 
less  than  $20,000.  Each  of  these  prospective  borrow- 
ers must  be  able  to  tender  as  security  for  his  loan  a 
first  mortgage  upon  the  land.  The  loan  can  not  exceed 
in  amount  fifty  per  cent,  of  the  value  of  the  land,  plus 
twenty  per  cent,  of  the  value  of  the  permanent,  insured 
improvements.  The  association  organizes  by  the 
execution  of  articles  of  association,  specifying  in  gen- 
eral terms  the  object  for  which  the  association  is 
formed  and  the  territory  in  which  its  operations  are 
to  be  carried  on,  signed  by  the  persons  uniting  to  form 
the  association,  and  the  sending  of  a  copy  thereof, 
together  with  its  applications  for  loans  and  other 
documents  provided  for  in  the  Act,  to  the  Federal 
Land  Bank  of  the  district  hereafter  described.  The 
association  also  elects  a  loan  committee  of  three  mem- 
bers, whose  duties  shall  be  to  appraise  and  evaluate 
the  lands  offered  as  security  for  the  mortgages,  and 
the  report  of  this  loan  conunittee  on  each  loan  must 
be  unanimous.    After  having  been  dealt  with  accord- 


16  MODERN  AMERICAN  LAW  LECTURE 

iug  to  law  by  the  Federal  Land  Bank  of  the  district, 
the  application  of  this  association  for  a  charter  is 
forwarded  to  the  Federal  Farm  Loan  Board  at  Wash- 
ington, and  if  the  application  is  approved  a  charter 
is  thereupon  issued,  whereupon  the  National  Farm 
Loan  Association  becomes  a  body  corporate  chartered 
by  the  United  States  Government.  As  such  a  body 
corporate  it  has  the  power  to  endorse  and  become 
liable  for  the  payment  of  mortgages  taken  from  its 
shareholders,  to  receive  from  its  land  bank  funds  ad- 
vanced under  the  law  and  to  deliver  the  necessary 
receipts  therefor,  to  acquire  and  dispose  of  such  prop- 
erty as  may  be  necessary  or  convenient  for  the  trans- 
action of  its  business,  and  to  issue  certificates  of 
deposit  for  current  funds,  convertible  into  farm  loan 
bonds  at  the  land  bank  of  the  district  in  the  amount  of 
$25  or  any  multiple  thereof,  but  not  to  receive  such  de- 
jjosits  for  any  other  purpose.  The  object  of  this  latter 
provision  is  worthy  of  special  notice.  Such  deposits 
can  not  be  held  by  the  association  but  must  be  sent 
immediately  upon  deposit  to  the  land  bank  and  in- 
vested in  farm  loan  bonds.  The  evident  intent  of  this 
provision  is  to  encourage  the  habit  of  thrift  and  sav- 
ing among  farmers  and  their  families  and  also  to  en- 
courage the  flotation  of  a  part  at  least  of  the  farm 
loan  securities  among  the  farmers  themselves. 

It  will  be  noted  that  the  articles  of  association  must 
describe  the  territory  in  which  the  association  expects 
to  do  business.  This  does  not  mean,  however,  that 
there  can  be  only  one  association  in  the  territory  de- 
scribed. The  boundaries  of  the  associations'  fields 
of  operation  may  overlap  so  that  different  classes  and 


THE  FEDERAL  FARM  LOAN  BUREAU      17 

groups  of  fai-mers  enjoy  perfect  freedom  in  organ- 
izing associations  of  such  numbers  and  territorial 
size  as  may  be  most  convenient  to  them. 

The  association  is  governed  by  a  board  of  five  or 
more  directors  elected  by  the  stockholder-borrowers, 
but  the  actual  clerical  work  is  done  by  an  officer 
called  a  secretary-treasurer,  who  has  charge  of  the 
funds  and  records  of  the  association  and  is  charged 
with  the  duty  of  conducting  its  correspondence.  He 
also  must  exercise  observation  over  the  investment 
of  the  funds  borrowed,  since  the  loans  are  made  for 
definite  purposes  set  forth  in  the  applications  for 
loans. 

PURPOSES  FOR  WHICH  LOANS  MAY  BE  MADE 

The  declared  purposes  of  the  x\ct  are  ' '  To  provide 
Capital  for  agricultural  development,  to  create  stand- 
ard forms  of  investment  based  upon  farm  mortgage, 
to  equalize  rates  of  interest  upon  fami  loans,  to 
furnish  a  market  for  United  States  bonds,  to  create 
Government  depositaries  and  financial  agents  for  the 
United  States,  and  for  other  purposes."  The  pri- 
mar}'  object,  therefore,  is  to  j^rovide  capital  for  agri- 
cultural development.  Loans  can  not,  therefore,  be 
made  to  farmers  under  the  Act  except : 

(a)  To  provide  for  the  purchase  of  land  for  agri- 
cultural uses; 

(b)  To  provide  for  the  purchase  of  equipment, 
fertilizers  and  live  stock  necessar}^  for  the  proper 
and  reasonable  operation  of  the  mortgaged  farm ; 

(c)  To  provide  buildings  and  for  the  improvement 
of  farm  lands;  and 


18  MODERN  AMERICAN  LAW  LECTURE 

(d)  To  liquidate  preexisting  indebtedness,  either 
on  mortgage  or  certain  other  indebtedness. 

The  restriction  as  to  the  right  to  borrow  for  the 
discharge  of  preexisting  debt  is  interesting  as  illus- 
trating the  spirit  of  the  Act.  A  farmer  may  borrow 
to  pay  off  any  debt  which  he  may  owe,  no  matter  how 
contracted,  if  such  debt  was  in  existence  at  the  time 
of  the  organization  of  the  first  National  Farm  Loan 
Association  established  in  or  for  the  county  in  which 
the  land  mortgaged  is  situated,  or  he  may  borrow  to 
pay  off  such  debts  if  subsequently  incurred  for  pur- 
poses mentioned  under  (a),  (b),  (c)  and  (d)  above. 

The  Act  thus  provides  a  universal  means  for  the 
extinguishment  and  funding  of  all  debts  no  matter 
how  unwisely  or  improvidently  incurred  prior  to  the 
establishment  of  the  system  in  actual  operation  in 
the  county  in  which  the  land  is  situated.  After  such 
establishment,  however,  a  new  era  begins  and  the 
Federal  Farm  Loan  system  will  not  help  out  of  his 
difficulties  any  agricultural  debtor  whose  liabilities 
have  been  incurred  for  reasons  which  are  regarded 
as  unfarmerlike.  The  terms  "equipment"  and  ''im- 
provement" in  the  Act  are  to  be  defined  for  bor- 
rowing purposes  by  the  Federal  Farm  Loan  Board. 

INTEREST  AND  TERMS  OF  PAYMENT 

The  law  fixes  six  per  cent.-  per  annum  as  the  maxi- 
mum rate  which  can  be  charged  on  farm  loans  under 
this  system.  The  minimum  rate,  however,  may  fall 
considerably  lower  than  this.  As  will  be  explained 
hereafter,  the  money  for  loaning  is  obtained  chiefly, 
as  heretofore,  from  investors.     In  this  system  it  is 


THE  FEDERAL  FARM  LOAN  BUREAU     19 

obtained  through  the  sale  by  Federal  land  banks  of 
securities  known  as  Federal  farm  loan  bonds.  These 
bonds  will  be  hereafter  described.  They  will  be  of- 
fered in  such  a  manner  as  to  merit  the  confidence  of 
investors,  and  it  is  anticipated  that  they  will  sell  at 
an  interest  rate  so  low  that  after  the  entire  expense 
of  marketing  them  and  of  producing  the  mortgages 
is  defrayed,  the  farmer  borrowers  will  enjoy  an  in- 
terest rate  of  fiye  per  cent.,  or  under.  European  land 
bonds  issued  imder  systems  somewhat  analogous  haye 
in  the  past  sold  at  interest  rates  averaging  as  low, 
or  almost  as  low,  as  the  interest  rate  on  the  bonds 
of  such  goyernments  as  Germany  and  France. 

The  rate  of  interest,  however,  is  of  importance 
secondary  perhaps  to  the  matter  of  terms  of  pay- 
ment. The  private  investor  in  farm  mortgages  has 
always  been  obliged  to  insist  upon  payment  or  re- 
newal of  the  loan  within  a  period  of  from  one  to  ten 
years,  and  in  the  vast  majority  of  cases  mortgages 
have  run  from  three  to  five  years  only.  As  heretofore 
stated,  these  periods  are  too  short  to  be  met  by  the 
slow  development  of  agriculture.  The  Federal  Farm 
Loan  Act,  therefore,  provides  that  every  mortgage 
shall  contain  an  agreement  providing  for  the  repay- 
ment of  the  loan  on  an  amortization  plan  by  means 
of  a  fixed  number  of  annual  or  semiannual  install- 
ments sufficient  to  cover,  first,  the  interest  on  the 
mortgage  and  second,  such  amounts  to  be  applied  on 
the  principal  as  will  extinguish  the  debt  within  an 
agreed  period  not  less  than  five  years  nor  more  than 
forty  years.  This  does  not  give  the  borrower  the 
right  of  payment  on  the  principal  except  after  the 


20  MODERN  AMERICAN  LAW  LECTURE 

lapse  of  five  years,  and  lie  may  take  the  loan  for  a 
period  of  forty  years  if  he  desires.  Under  this  plan 
if  the  interest  rate  is  five  per  cent,  and  the  amortiza- 
tion charge  one  per  cent.,  the  loan  will  be  completely 
extinguished  in  about  thirty-six  years.  The  borrower 
is  given  great  freedom  in  the  matter  of  payments 
after  the  lapse  of  five  years,  since  he  is  permitted  at 
any  interest  date  to  pay  off  the  principal  in  whole 
or  in  part,  and  payments  as  small  in  amount  as  $25 
will  be  accepted  on  the  principal.  Under  this  system, 
therefore,  the  borrower  has  complete  control  over  his 
terms  of  pa}^nent,  subject  to  the  annual  charges.  In 
the  past  the  lender  has  had  the  right  to  call  the  loan 
when  due.  Under  the  Federal  Farm  Loan  system 
this  option  is  transferred  to  the  borrower  and  all 
anxiety  and  uncertainty  with  reference  to  the  ma- 
turity of  the  loan  is  at  an  end. 

In  the  past  in  many  parts  of  the  United  States 
while  the  farmer  carrying  on  operations  in  a  large 
way  or  possessing  land  of  a  considerable  value  has 
been  able  to  secure  loans  with  ease,  the  needs  of  the 
small  farmer  have  not  been  so  adequately  met. 
His  transaction  has  not  been  of  value  to  loaning  in- 
stitutions. It  has  been  quite  as  expensive  to  the 
investor  to  make  a  loan  of  $500  as  one  of  $5000, 
Therefore,  the  rate  to  the  small  farmer,  when  com- 
missions and  brokerage  are  considered,  has  been  un- 
duly high,  and  in  many  parts  of  the  country  he  has 
been  unable  to  secure  money  at  all.  Under  the  Fed- 
eral Farm  Loan  system  loans  may  be  made  for  as 
small  an  amount  as  $100.  The  provision  for  the 
borrowing  of  money  for  the  purchase  of  agricultural 


THE  FEDERAL  FARM  LOAN  BUREAU     21 

land  might  lend  itself  to  the  purchase  of  land  for 
speculative  purposes  were  it  not  for  the  fact  that 
the  law  limits  the  aggregate  loans  to  any  one  indi- 
vidual under  the  law  to  $10,000. 


WHO  MAY  NOT  BORROW 

As  stated  above,  the  law  presupposes  that  the  bor- 
rower is,  or  is  about  to  become  engaged,  in  the  cul- 
tivation of  the  land  mortgaged.  This  does  not  neces- 
sarily mean  that  he  must  be  cultivating  it  with  his 
own  hands.  The  farmer  who  is  incapacitated  by 
illness  or  otherwise  may  cultivate  the  lands  by  hired 
labor.  There  are  village  communities  in  Utah  made 
up  of  farmers  who  live  in  the  villages  and  go  out  to 
their  farms  to  cultivate  them.  These  may  borrow  al- 
though they  do  not  live  upon  the  lands.  There  are 
communities  in  other  parts  of  the  country  in  which 
the  people  live  at  some  distance  from  their  lands  be- 
cause of  the  insalubrious  character  of  the  climate  of 
the  farms  themselves.  These  also  may  borrow  al- 
though they  do  not  live  upon  the  land.  Farmers  who 
live  in  towns  and  carry  on  their  farms  by  their  o\\ti 
or  hired  labor,  or  both,  maj^  borrow  under  the  Act. 
In  short,  anyone  who  cultivates  the  land  mortgaged 
either  by  his  own  or  hired  labor  may  borrow,  but  the 
lands  must  be  farms  and  not  waste  or  unimproved 
lands,  and  if  the  owner  lets  them  out  on  rent  under 
any  system,  he  is  thereby  rendered  ineligible  as  a 
borrower.  Such  financial  pressure  as  the  system  pos- 
sesses is,  therefore,  constantly  exerted  in  the  direction 
not  only  of  better  farming  but  in  favor  of  the  actual 


22  MODERN  AMERICAN  LAW  LECTURE 

cultivator  of  the  soil  as  distinguished  from  the  land- 
lord. 

GOVERNMENT  REGULATION  AND  APPRAISMENT 

The  National  Farm  Loan  Associations  are  char- 
tered by  the  United  States  Government  through  the 
Federal  Farm  Loan  Bureau  and  their  affairs  are 
under  the  supervision  and  examination  of  the  Gov- 
ernment in  a  manner  analogous  to  the  control  over 
national  banks.  Moreover,  the  Government  does  not 
leave  to  the  loan  committees  of  the  farm  loan  asso- 
ciations the  entire  matter  of  appraisement  and  valua- 
tion of  lands.  After  the  applications  from  a  farm 
loan  association  have  gone  to  the  land  bank,  the  Fed- 
eral FaiTn  Loan  Bureau  causes  an  appraisement  of 
the  lands  to  be  made  by  appraisers  appointed  by  the 
Federal  Farm  Loan  Board,  and  no  loans  are  made 
to  farmers  unless  approved  by  these  appraisers. 

INVESTMENT  AND  LIABILITIES  OF  BORROWERS 

The  borrower  is  of  course  liable  upon  his  mort- 
gage to  the  Federal  land  banlv,  to  which  it  is  given 
for  his  loan.  For  reasons  connected  with  the  safety 
of  the  system  and  its  extension  he  is  obliged  to  as- 
sume certain  other  direct  liabilities  as  well  as  a  con- 
tingent one.  When  he  joins  a  National  Farm  Loan 
Association  he  is  required  to  become  not  only  a  mem- 
ber of  it,  but  an  investor  in  it.  The  National  Farm 
Loan  Association  is  a  corporation  owned  by  its 
stockholders,  and  its  stockholders  are  borrowers  only. 
Each  borrower  is  required  to  purchase  stock  in  his 
local  association  to  the  amount  of  five  per  cent,  of  his 


THE  FEDERAL  FARM  LOAN  BUREAU     23 

loan.  All  funds  so  received  by  the  National  Farm  Loan 
Association  are  at  once  used  in  purchasing  stock  in 
the  Federal  land  bank  of  the  district.  Thus,  the  bor- 
rower is  a  stockholder  in  his  association  and  the  asso- 
ciation is  a  stockholder  in  the  Federal  land  bank. 
Each  association  becomes  a  guarantor  of  the  pay- 
ment, both  as  to  principal  and  interest,  of  the  loans 
made  to  its  members.  This  guaranty,  of  course,  can  be 
enforced  only  to  the  extent  of  the  assets  of  the  associa- 
tion, and  these  assets  consist  mainly  of  its  stock  in 
the  Federal  land  bank.  While  he  remains  a  bor- 
rower the  member  of  a  National  Farm  Loan  Associa- 
tion continues  to  hold  his  stock  in  the  association, 
and  when  he  pays  off  his  loan  the  stock  is  retired  at 
par  and  the  borrower 's  money  returned  to  him .  Should 
any  member  of  the  association,  however,  receive  a 
loan  made  unwisely  or  improvidently  whereby  it 
should  suffer  losses,  this  stock  might  be  absorbed  in 
making  good  such  losses  and  the  borrower  would, 
therefore,  lose  this  investment.  Thus,  the  borrow- 
ers' investments  in  stock  of  their  association  consti- 
tute a  guaranty  fund  of  one-twentieth  the  amount  of 
the  loans.  This  adds  to  the  caution  and  conservation 
of  the  loan  committees  and  provides  a  guaranty  fund 
against  bad  loans.  In  addition  to  this  the  stock- 
holders in  National  Farm  Loan  Associations  have 
the  same  double  liability  on  the  stock  held  by  tlicm 
which  prevails  as  against  stockholders  in  national 
banks.  The  direct  and  contingent  liabilities,  there- 
fore, of  the  borrowers  and  the  Federal  Farm  Loan 
system  amount  to  ten  per  cent,  of  the  face  of  the 
loans. 


24  MODERN  AMERICAN  LAW  LECTURE 

THE  FEDERAL  LAND  BANK  SYSTEM 

Several  references  have  been  made  to  Federal  land 
banks.  These  banks  constitute  the  agencies  by  which 
money  is  obtained  from  investors  and  loaned.  They 
are  twelve  in  number  and  cover  in  their  operations 
tlie  entire  continental  United  States,  exclusive  of 
Alaska.  Their  locations  and  territories  are  as 
follows : 

The  Springfield,  Massachusetts,  bank,  District  No. 
1,  has  jurisdiction  over  the  New  England  states.  New 
York,  and  New  Jersey ; 

The  Baltimore,  Maryland,  banlv.  District  No.  2, 
has  jurisdiction  over  Pennsylvania,  Delaware,  Mary- 
land, West  Virginia,  Virginia  and  the  District  of 
Columbia ; 

The  Columbia,  South  Carolina,  bank.  District  No. 
3,  has  jurisdiction  over  the  Carolinas,  Georgia  and 
Florida ; 

The  Louisville,  Kentucky,  bank.  District  No.  4, 
has  jurisdiction  over  Ohio,  Indiana,  Kentucky  and 
Tennessee ; 

The  New  Orleans,  Louisiana,  bank.  District  No. 
5,  has  jurisdiction  over  Alabama,  Mississippi  and 
Louisiana ; 

The  St.  Louis,  Missouri,  bank.  District  No.  6,  has 
jurisdiction  over  Illinois,  Missouri  and  Arkansas; 

The  St.  Paul,  Minnesota,  bank.  District  No.  7,  has 
jurisdiction  over  Michigan,  Wisconsin,  Minnesota 
and  North  Dakota; 

The  Omaha,  Nebraska,  bank,  District  No.  8,  has 
jurisdiction  over  Iowa,  South  Dakota,  Nebraska  and 
Wyoming ; 


THE  FEDERAL  FARM  LOAN  BUREAU     25 

The  Wichita,  Kansas,  bank,  District  No.  9,  has 
jurisdiction  over  Kansas,  Oklahoma,  Colorado  and 
New  Mexico ; 

The  Houston,  Texas,  bank,  District  No.  10,  has 
jurisdiction  over  Texas; 

The  Berkeley,  California,  bank.  District  No.  11, 
has  jurisdiction  over  California,  Nevada,  Utah  and 
Arizona ; 

The  Spokane,  Washington,  bank,  District  No.  12, 
has  jurisdiction  over  Washington,  Oregon,  Idaho 
and  Montana. 

The  law  provides  for  a  temporary  board  of  direc- 
tors consisting  of  a  president,  a  vice  president,  a 
treasurer  and  a  secretary,  all  of  whom  are  directors, 
and  an  additional  director,  making  a  board  of  five 
appointed  by  the  Federal  Farm  Loan  Board.  The 
permanent  organization  takes  place  in  any  bank 
whenever  the  subscriptions  to  stock  in  the  Federal 
land  bank  by  National  Farm  Loan  Associations  shall 
have  reached  the  sum  of  $100,000.  This  organization 
is  effected  by  the  election  of  six  local  directors  by  the 
National  Farm  Loan  Associations  of  the  district  and 
the  appointment  of  three  district  directors  by  the 
Federal  Farm  Loan  Board.  Thereafter,  the  affairs 
of  the  Federal  land  bank  will  be  conducted  by  this 
permanent  organization.  The  Act  thus  becomes  even 
as  to  the  organization  of  the  land  bank's  cooperative 
system  of  borrowers. 

The  Sources  of  Funds 

The  land  banks  when  organized  have  an  initial 
supply  of  money  furnished  in  the  main  by  the  Trea- 


26  MODERN  AMERICAN  LAW  LECTURE 

sury  of  the  United  States.    This  initial  capital  fur- 
nished in  part  by  the  Government  and  to  a  very 
limited    extent   by   private    investors    amounts    to 
$750,000  for  each  bank,  or  $9,000,000  in  aU.     This 
sum,  however,  is  only  a  supply  of  ready  cash  for  the 
beginning  of  business.    The  regular  supply  of  money 
must  be  obtained  from  investors.    This  is  done  in  the 
following  manner:     When  any  bank  has  accepted 
mortgages  to  the  amount  of  $50,000  or  more,  it  may 
apply  through  a  resident  officer  of  the  Farm  Loan 
Bureau  known  as  the  registrar  for  authority  to  issue 
Federal  Farm  Loan  bonds.   Permission  to  issue  these 
bonds  must  be  given  by  the  Federal  Farm  Loan 
Board.    The  rate  of  interest  payable  on  these  bonds 
is  the  lowest  which  can  be  obtained  in  the  money 
market  at  the  time  of  their  issue.    In  order  that  these 
bonds  may  be  attractive  to  investors  they  are  issued 
in  denominations  of  $25,  $50,  $100,  $500  and  $1000, 
are  prepared  by  the  Bureau  of  Engraving  and  Print- 
ing in  Washington,  are  protected  by  the  criminal  law 
against  counterfeiting,  are  made  the  joint  and  several 
liability  of  all  the  land  banks,  and  are  declared  by  the 
Act  to  be  instrumentalities  of  the  Government  and 
exempt  from  all  forms  of  taxation.  State  and  Fed- 
eral.   They  are  secured,  as  has  been  stated,  by  farm 
mortgages  placed  on  a  conservative  valuation  under 
an  appraisal,  first  by  the  farmers  themselves  and  sec- 
ond by  a  Government  appraiser,  are  further  secured 
by  the  stock  investments  of  the  borrowers  in  the  sys- 
tem and  by  the  double  liability  on  the  stock  in  the 
National  Farm  Loan  Associations. 
Any  lowering  in  the  rate  of  interest  attributable 


THE  FEDERAL  FARM  LOAN  BUREAU     27 

to  this  attractive  form  of  investment  will  inure  to 
the  benefit  of  borrowers  under  the  system  by  reason 
of  the  fact  that  the  rate  paid  by  a  borrower  is  made 
up  by  adding  together  the  interest  rate  on  Federal 
farm  loan  bonds  and  the  expenses  of  operation  of  the 
Federal  land  bank.  Thus,  if  the  rate  on  Federal 
farm  loan  bonds  is  five  per  cent,  per  annum  and  the 
Federal  land  bank  of  the  district  requires  one  per 
cent,  per  annmn  to  pay  its  cost  of  operation,  the  rate 
to  the  farmer  will  be  six  per  cent.,  which  is  the  maxi- 
mum rate  under  the  system.  If,  on  the  other  hand, 
the  time  should  come  when  Federal  farm  loan  bonds 
sell  at  a  price  yielding  an  interest  rate  of  three  and 
one-half  per  cent.,  the  farmers  in  any  district  in 
which  the  Federal  land  bank  is  able  to  do  business 
on  a  basis  of  one-eighth  of  one  per  cent,  will  be  able 
to  borrow  money  at  three  and  five-eighths  per  cent, 
per  annum.  The  maximum  amount  which  the  Fed- 
eral land  bank  can  charge  for  cost  of  operation  is  one 
per  cent,  per  annum. 

CAPACITY  FOR  BUSINESS  EXPANSION 

The  Federal  Farm  Loan  system  has  the  capacity 
to  expand  to  an  extent  which  will  make  it  capable  of 
doing  any  possible  volume  of  business.  The  Federal 
land  banks  are  permitted  by  law  to  issue  bonds  to  the 
extent  of  twenty  times  their  capital  stock.  The  origi- 
nal stock  being  nine  million  dollars  for  the  twelve 
banks,  a  business  is  at  once  authorized  of  one  hun- 
dred and  eighty  million  dollars  in  loans.  It  T\all  be 
remembered,  however,  that  each  borrower  by  the  in- 
vestment of  five  per  cent,  of  his  loan  in  the  stock  of 


28  MODERN  AMERICAN  LAW  LECTURE 

his  association  enables  his  association  to  purchase  an 
equal  amount  of  stock  in  his  district  Federal  land 
bank.     Every  loan  made,  therefore,   expands  the 
stock  of  the  Federal  land  bank  of  the  district  to  a 
point  which  will  enable  it  to  make  an  additional  loan 
of  the  same  amount.    Thus,  the  authority  to  do  busi- 
ness automatically  expands  to  an  extent  commen- 
surate with  the  growth  of  the  business.    The  original 
stock  of  the  land  bank,  whether  taken  by  the  govern- 
ment or  by  private  subscriptions,  will  ultimately  be 
retired  under  a  provision  which  requires  each  Fed- 
eral land  bank,  after  subscriptions  to  its  capital  stock 
by  National  Farm  Loan  Associations  shall  amount  to 
$750,000,  to  apply  semi-annually  to  the  retirement 
of  these  original  shares  of  stock  twenty-five  per  cent, 
of  all  sums  thereafter  subscribed  until  all  such  origi- 
nal capital  stock  is  retired  at  par.    This  retirement, 
however,  does  not  operate  to  prevent  the  indefinite 
extension  of  the  operations  of  the  banks  as  above 
described. 

CONSTITUTIONALITY  OF  LAW 

The  Federal  Farm  Loan  Act  covers  a  very  complex 
and  extensive  field  of  human  endeavor  and  will  as  the 
years  pass  undoubtedl}^  become  the  basis  of  an  im- 
portant title  of  the  law  No  question  has  arisen  as 
to  its  constitutionality  except  as  to  Section  26,  which, 
after  exempting  from  all  taxation  every  Federal  land 
bank  and  every  National  Farm  Loan  Association, 
including  the  capital  and  reserve  or  surplus  therein 
or  income  derived  therefrom,  except  taxes  on  real 
estate,  provides  as  follows : 


THE  FEDERAL  FARM  LOAN  BUREAU     29 

First  mortgages  executed  to  Federal  Land  Banks,  or  to  Joint 
Stock  Land  Banks,  and  farm  loan  bonds  issued  under  the  pro- 
visions of  this  act,  shall  be  deemed  and  held  to  be  instrumental- 
ities of  the  Government  of  the  United  States,  and  as  such  they 
and  the  income  derived  therefrom  shall  be  exempt  from  Federal, 
State,  municipal,  and  local  taxation. 

Certain  criticisms  have  been  directed  against  the 
constitutionality  of  this  section  of  the  Act  and  for 
the  purpose  of  meeting  these  the  Secretary  of  the 
Treasury  some  time  in  January,  1917,  requested  of 
the  Attorney  General  an  opinion  on  the  matter.  The 
Attorney  General  on  January  30th  rendered  an 
opinion,  the  concluding  paragraphs  of  which  are  as 
follows : 

A  tax  upon  these  bonds  and  mortgages  would,  therefore,  be 
a  tax  upon  the  most  important  operations  of  the  system,  and 
might  hamper  it  to  so  great  an  extent  as  to  render  it  unsuccess- 
ful. In  other  words,  it  might  be  found  impossible  to  raise  cap- 
ital by  means  of  the  bonds,  and  it  might  be  found  impossible  to 
loan  money  on  the  mortgages  at  the  reasonable  rate  of  interest 
desired,  if  these  two  fundamental  instrumentalities  were  taxed 
by  the  States.  At  any  rate,  Congress  might  well  think  so,  and 
its  declaration  upon  the  subject  is  conclusive. 

I  have  the  honor  to  advise  you,  therefore,  that,  in  my  opinion, 
that  portion  of  Section  26  exempting  the  mortgages  and  bonds 
from  State,  municipal,  and  local  taxation  is  constitutional. 

In  arriving  at  this  opinion  the  Attorney  General 
considered  and  cited  McCulloch  v.  the  State  of  Mary- 
land, 4  Wheat.  316,  and  certain  cases  following,  and 
similar  to,  that  case,  and  also  the  following :  Weston 
V.  the  City  of  Charleston,  2  Peters  449 ;  Bank  v.  Su- 
pervisors, 7  Wall.  26;  Talbott  v.  The  Silver  Bow 
County,  139  U.  S.  438,  440;  People  v.  Weaver,  100 
U.  S.  539,  543 ;  Farmers  Bank  v.  Minnesota,  232  U.  S. 


30  MODERN  AMERICAN  LAW  LECTURE 

516;  Choctaw  and  Gulf  Railroad  v.  Harrison,  235 
U.  S.  292 ;  and  Indian  Oil  Co.  v.  Oklahoma,  240  U.  S. 
522,  529.  These  cases  would  seem  to  be  conclusive 
as  to  the  constitutionality  of  this  feature  of  the  Act. 

FEDERAL  FARM  LOAN  BOARD 

The  correlating,  managing,  examining  and  gov- 
erning body  of  the  Federal  Farm  Loan  system  is  the 
Federal  Farm  Loan  Board  at  Washington.  This 
Board  consists  of  the  Secretary  of  the  Treasury,  ex 
officio  a  member  of  the  Board  and  its  chairman,  and 
four  members  appointed  by  the  President,  one  of 
whom  is  designated  by  the  President  as  Farm  Loan 
Commissioner  and  is  the  executive  head  of  the  Board 
charged  with  certain  special  official  duties.  The  four 
appointed  members  of  the  Board  were  originally  ap- 
pointed for  terms  of  office  of  two,  four,  six  and  eight 
years  respectively,  but  at  the  expiration  of  each  of 
the  shorter  terms  the  new  appointments  are  for  eight 
years.  This  Board  controls  the  system  through  a 
bureau  at  Washington.  It  appoints  the  temporary 
boards  of  directors  of  the  twelve  land  banks,  the  local 
directors  in  the  permanent  organizations,  the  twelve 
registrars,  all  the  appraisers,  and  such  other  officers, 
agents,  and  experts  as  may  be  required  for  the  sys- 
tem. It  is  empowered  to  print  and  distribute  matters 
relating  to  publicity  for  the  system.  It  charters  Fed- 
eral land  banks,  Federal  joint  stock  land  banks  and 
National  Fann  Loan  Associations,  and  has  general 
powers  of  supervision,  regulation  and  examination. 
One  of  the  most  significant  things  perhaps  in  the  sys- 
tem is  that  a  bureau  is  established  in  Washington 


THE  FEDERAL  FARM  LOAN  BUREAU     31 

having  the  duty  and  the  power  constantly  to  study 
and  examine  the  whole  question  of  financing  the 
farmers  of  the  United  States  on  land  mortgage. 

PERSONAL  CREDIT  FOR  FARMERS 

The  Federal  Farm  Loan  system  is  a  land  mort- 
gage system  pure  and  simple.  It  is  a  well  recognized 
economic  fact  that  farmers  have  personal  credit 
needs  and  needs  for  short  tune  accommodations  on 
farm  mortgage  which  are  peculiar  to  themselves. 
These  needs  are  not  met  and  are  not  intended  to  be 
met  by  the  Federal  Farm  Loan  system.  The  Federal 
Reserv^e  Act,  however,  has  so  changed  the  law  with 
relation  to  national  banks  that  the  amount  of  land 
mortgage  credit  which  can  legally  be  extended  by 
them  to  farmers  is  greatly  increased.  The  Federal 
Fai-m  Loan  system  does  not  loan  money  on  farm 
mortgage  for  a  term  less  tlian  five  years.  The  Fed- 
eral Eeserve  Act,  however,  gives  the  national  banks 
of  the  country  legal  authority  to  meet  this  short  time 
farm  mortgage  need,  and  of  course  the  field  for  mak- 
ing such  loans  is  still  open  to  trust  companies,  savings 
banks,  private  capitalists,  insurance  companies,  and 
all  other  accumulations  of  loanable  capital. 

Unquestionably  there  is  a  need  in  every  state  in 
the  Union  for  better  agencies  for  the  loaning  of 
money  on  personal  credit  in  small  or  large  sums  and 
on  short  time  to  farmers.  The  Federal  Reserve  Act 
has  in  part  met  this  need  by  making  the  commercial 
paper  of  farmers  eligible  for  rediscount  in  the  Fed- 
eral reserve  banks  when  given  for  periods  of  time 
longer  than  that  accorded  to  ordinary  commercial 


32  MODERN  AMERICAN  LAW  LECTURE 

paper,  and  the  obligations  of  fanners  secured  on 
properly  margined  warehouse  receipts  have  been 
made  eligible  to  a  lower  discount  rate  in  the  Federal 
reserve  banks  than  that  accorded  to  other  paper. 
These  measures,  however,  w^hile  important,  do  not 
afford  complete  relief.  The  National  Government 
has  as  yet  left  to  the  states  and  to  private  capital  the 
field  of  meeting  these  peculiar  needs  of  the  farmer. 
Bills  have  been  introduced,  however,  in  Congress  for 
a  personal  rural  credits  system  and  the  matter  is  still 
open  to  Congressional  action. 

There  is  another  great  field  open  to  state  and  na- 
tional legislation  and  that  is  the  furnishing  of  credit 
for  the  purchase  of  land  and  equipment  to  tenant 
farmers  and  farm  laborers  who  have  not  the  means 
with  which  to  purchase  land  and  establish  themselves 
as  farmers.  This  object  can  not  be  accomplished  on 
strictly  fann  mortgage  principles  and  involves  the 
advancement  of  funds  and  the  acquisition  of  lands 
under  a  degree  of  personal  and  financial  tutelage, 
which  is  not  required  where  farm  property  of  recog- 
nized value  maybe  tendered  as  security  for  mortgages. 
The  matter  is  of  great  sociological  importance,  how- 
ever, and  in  some  states  is  being  taken  up  and  pressed 
vigorously.  The  second  mortgage  under  the  long 
time  amortized  Federal  farm  loan  becomes  a  much 
better  security  than  one  made  subject  to  a  short  time 
mortgage  and  there  is  considerable  interest  in  many 
parts  of  the  country  in  the  establishment  of  agencies 
either  private  or  governmental  for  handling  such 
second  mortgages,  and  thus  enabling  tenant  farmers 
and  others  who  can  not  pay  fifty  per  cent,  of  the  value 


THE  FEDERAL  FARM  LOAN  BUREAU     33 

of  their  lands  to  be  financed  into  actual,  independent 
farai  ownership.  The  development  of  these  move- 
ments promises  to  be  one  of  the  most  interesting 
things  in  the  future  of  American  agriculture. 

CONCLUSION 

We  have  here,  therefore,  a  very  important  new 
development  in  American  life:  first,  an  important 
governmental  bureau  having  control  over  the  land 
mortgage  business  of  such  farmers  as  choose  to  en- 
roll themselves  in  it ;  second,  twelve  great  loan  com- 
panies under  cooperative  management  for  the  pur- 
pose of  assembling  the  available  money  of  the  United 
States  for  investment  in  farni  mortgage  securities 
and  for  tendering  to  the  investors  of  the  United 
States,  large  and  small,  a  security  based  upon  farm 
mortgages  which  are  themselves  held,  conserved  and 
controlled  by  government  officers  appointed  for  that 
purpose;  and  third,  an  extensive  system  or  coopera- 
tive organizations  of  farmers  whose  prunary  busi- 
ness is  to  control  as  borrowers  the  conditions  under 
w^hich  they  borrow,  but  whose  secondary  preoccupa- 
tion will  be  so  to  conduct  their  farming  operations 
as  to  make  them  the  basis  of  safe  investment.  This 
of  course  means  better  agriculture. 

Sociologically^  it  may  be  expected  that  the  organ- 
ization of  farmers  into  cooperative  associations  of 
borrowers  will  stimulate  an  interest  in  cooperation 
along  other  lines,  thus  accomplishing  a  result  which 
is  almost  universally  admitted  to  be  desirable.  Tlie 
interest  rates  in  all  parts  of  the  country  are  ahnost 
sure  to  be  equalized,  as  the  fundamental  security 


34  MODERN  AMERICAN  LAW  LECTURE 

back  of  all  the  bonds  offered  is  the  same.  The  fact 
that  in  every  part  of  the  United  States  land  values 
will  be  officially  appraised  and  such  appraisements 
made  public  will  no  doubt  tend  greatly  to  the  stabiliza- 
tion of  land  values  on  farms  and  shoidd  prevent  the 
development  of  booms  based  on  fictitious  and  illusory 
conceptions  of  the  profits  to  be  made  in  colonization 
schemes  and  other  land  promotions.  The  system  will 
doubtless  result  in  some  increase  in  land  values,  but 
this  increase  may  be  expected  to  be  stable  rather  than 
speculative,  since  the  financial  pressure  of  the  sys- 
tem is  exerted  in  the  direction  not  of  speculation  in 
farm  lands  or  the  holding  of  them  out  of  use  for 
monopolistic  increments  in  value  but  in  favor  of  the 
actual  cultivator  of  the  soil.  The  object  for  ^vhich 
the  Act  has  been  passed  is  a  great  one  and  is  strictly 
in  harmony  with  the  very  best  thought  not  only  in 
this  country  but  in  the  world  at  large.  The  interest 
already  shown  by  farmers  and  investors  all  over  the 
United  States  seems  to  prove  that  the  success  of  the 
system  is  not  open  to  question. 


GAYLAMOUNTS) 
PAMPHLET  BINDER 
SS       Syracuse,  N.Y. 
:^^S       Stockton,  Collf. 


000  784  225 


